MONOLITHIC POWER SYSTEMS, INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements concerning:
• the above-average industry growth of product and market areas that we have
targeted,
• our plan to increase our revenue through the introduction of new products
within our existing product families as well as in new product categories and
families,
• our belief that we may incur significant legal expenses that vary with the
level of activity in each of our current or future legal proceedings,
• the effect that liquidity of our investments has on our capital resources,
• the continuing application of our products in the storage and computing,
enterprise data, automotive, industrial, communications and consumer markets,
• estimates of our future liquidity requirements, • the cyclical nature of the semiconductor industry,
• the effects of macroeconomic factors, including the COVID-19 pandemic, the
global economic downturn and the conflict between
global economy, the semiconductor industry and our business,
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Table of Contents • protection of our proprietary technology, • business outlook for the remainder of 2022 and beyond,
• the factors that we believe will impact our business, operations and financial
condition, as well as our ability to achieve revenue growth,
• the percentage of our total revenue from various end markets,
• our ability to identify, acquire and integrate companies, businesses and
products, and achieve the anticipated benefits from such acquisitions and
integrations,
• the impact of various tax laws and regulations on our income tax provision,
financial position and cash flows,
• our plan to repatriate cash from our subsidiary in Bermuda ,
• our intention and ability to pay cash dividends and dividend equivalents, and
• the factors that differentiate us from our competitors. In some cases, words such as "would," "could," "may," "should," "predict," "potential," "targets," "continue," "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," "project," "forecast," "will," the negative of these terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives about our business, our industry and the global economy, including our expectations regarding the potential impacts of macroeconomic factors, including the COVID-19 pandemic, the global economic downturn and the conflict inUkraine on our business, industry and the global economy. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K and, in particular, in the section entitled "Risk Factors." Except as required by law, we disclaim any duty to, and undertake no obligation to, update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that we file from time to time with theSEC , such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 25
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Table of Contents Overview We are a global company that provides high-performance, semiconductor-based power electronics solutions. Incorporated in 1997, our three core strengths include deep system-level knowledge, strong semiconductor design expertise, and innovative proprietary semiconductor process and system integration technologies. These combined strengths enable us to deliver highly integrated monolithic products that offer energy-efficient, cost-effective, easy-to-use solutions for systems found in storage and computing, enterprise data, automotive, industrial, communications and consumer applications. Our mission is to reduce total energy and material consumption in our customers' systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy-efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories. We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term.
We work with third parties to manufacture and assemble our ICs. This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.
Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical supply chain lead times for orders are generally 16 to 26 weeks. For several consecutive quarters, we have experienced high customer demand, which has resulted in longer than usual lead times. These factors, combined with the fact that our customers can cancel or reschedule orders without significant penalty to the customer, make the forecasting of our orders and revenue difficult. We derive most of our revenue from sales through distribution arrangements and direct sales to customers inAsia , where our products are incorporated into end-user products. Our revenue from direct and indirect sales to customers inAsia was 88% and 90% for the three months endedJune 30, 2022 and 2021, respectively, and 89% and 90% for the six months endedJune 30, 2022 and 2021, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the storage and computing, enterprise data, automotive, industrial, communications and consumer markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and continue to secure manufacturing capacity.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has had, and continues to have, a significant impact around the world. Our primary focus is to continue to execute our business plan and mitigate the effect of the COVID-19 pandemic on our financial position and operations, while actively taking all necessary precautions to ensure the safety of our employees, our suppliers and our customers. The pandemic did not have a material adverse impact on our overall operating results or business operations for the three and six months endedJune 30, 2022 . In recent months,China experienced an increase in outbreaks, specifically inShanghai where we have business operations and where many of our customers and suppliers are located. Local governments implemented strict measures including quarantines, shutdowns and other business restrictions, which resulted in logistics challenges across the region and throughoutChina . Although the strict measures have since been lifted and the disruptions did not have a material adverse impact on our operations or financial condition for the three and six months endedJune 30, 2022 , we will continue to monitor and evaluate future developments. However, we cannot reasonably estimate the potential effect of these measures on the global economy, the semiconductor industry and our business. We have worked, and are continuing to actively work, with our stakeholders, including customers, suppliers and employees, to address the impact of the pandemic. We will continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences to the extent feasible. A prolonged economic slowdown as a result of the pandemic, or otherwise, could materially and adversely impact our business, results of operations and financial condition for the remainder of 2022 and beyond. 26
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Conflict between
As the conflict betweenUkraine andRussia continues to evolve, we are closely monitoring the impact of future developments on our business, supply chain, employees, customers and other business partners. Our total revenue inRussia has historically not been material. Early in the conflict, we changed our payment terms to require payment in advance from our customers inRussia . Subsequently, we stopped shipping to customers inRussia . All accounts receivable balances from our customers inRussia have been paid.
Cybersecurity Risk Management
We are committed to protecting our information technology ("IT") assets, including computers, systems, corporate networks and sensitive data, from unauthorized access or attack. We have established an internal global IT policy handbook as well as IT security management control procedures designed to:
? Create information security awareness and define responsibilities among our
employees and business partners; ? Implement controls to identify IT risks and monitor the use of our systems and
information resources; ? Establish key policies and processes to adequately and timely respond to
security threats; ? Maintain disaster recovery and business continuity plans; and ? Ensure compliance with applicable laws and regulations regarding the management
of information security. We require all new employees to attend an IT security training orientation. In addition, on an as-needed basis, our IT team provides trainings and updates to employees related to our policies and procedures. OurIT Steering Committee , which consists of our senior management and IT team, meets on a regular basis to review initiatives and projects to improve IT security, as well as resources and budgets for our cybersecurity compliance and education efforts. We completed the ISO 27001 certification, a globally recognized information security standard, in 2021. Our Audit Committee of the Board of Directors, which consists of three independent members, is responsible for the oversight of our cybersecurity risk program. On a regular basis, the Audit Committee reviews reports and updates from our Chief Financial Officer and IT senior management about major risk exposures, their potential impact on our business operations, and management's strategies to assess, monitor and mitigate those risks. The Audit Committee also provides updates of their oversight and findings to the Board of Directors. We believe we have adequate resources and sufficient policies, procedures and oversight in place to identify and manage our IT security risks to our business operations. To date, we do not believe we have experienced any material information security breaches and have not incurred significant operating expenses related to information security breaches.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying disclosures. Estimates and judgments used in the preparation of our condensed consolidated financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, including demand for our products, economic conditions and other current and future events, such as macroeconomic factors, including the impact of the COVID-19 pandemic, the global economic downturn and the conflict betweenUkraine andRussia . Actual results could differ from these estimates and assumptions, and any such differences may be material to our condensed consolidated financial statements. As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require our management to update the significant estimates and assumptions used in the preparation of the condensed consolidated financial statements, as compared to those disclosed in the Annual Report on Form 10-K for the year endedDecember 31, 2021 . As new events continue to evolve and additional information becomes available, any changes to these estimates and assumptions will be recognized in the condensed consolidated financial statements as soon as they become known. 27
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Table of Contents Results of Operations
The table below sets forth the data on the Condensed Consolidated Statements of Operations as a percentage of revenue:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in thousands, except percentages)
Revenue $ 461,004 100.0 % $ 293,317 100.0 % $ 838,718 100.0 % $ 547,772 100.0 %
Cost of revenue 190,043 41.2 129,102 44.0 348,877 41.6 242,498 44.3
Gross profit 270,961 58.8 164,215 56.0 489,841 58.4 305,274 55.7
Operating
expenses:
Research and
development 57,131 12.4 44,753 15.3 111,234 13.3 86,645 15.8
Selling, general
and
administrative 70,668 15.3 57,238 19.5 137,822 16.4 108,691 19.8
Litigation
expense 1,274 0.3 1,596 0.5 2,763 0.3 3,224 0.6
Total operating
expenses 129,073 28.0 103,587 35.3 251,819 30.0 198,560 36.2
Operating income 141,888 30.8 60,628 20.7 238,022 28.4 106,714 19.5
Other income
(expense), net (5,092 ) (1.1 ) 3,031 1.0 (5,726 ) (0.7 ) 5,618 1.0
Income before
income taxes 136,796 29.7 63,659 21.7 232,296 27.7 112,332 20.5
Income tax
expense 22,117 4.8 8,490 2.9 38,051 4.5 11,750 2.1
Net income $ 114,679 24.9 % $ 55,169 18.8 % $ 194,245 23.2 % $ 100,582 18.4 %
Revenue
In the first quarter of 2022, we reorganized our end markets and broke out
Computing and Storage into two new end markets: (1) Storage and Computing, and
(2) Enterprise Data. All prior-period amounts have been restated to reflect the
changes. The following table summarizes our revenue by end market:
Three Months Ended June 30, Six Months Ended June 30,
% of % of % of % of
End Market 2022 Revenue 2021 Revenue Change 2022 Revenue 2021 Revenue Change
(in thousands, except percentages)
Storage and
Computing $ 122,288 26.5 % $ 57,795 19.7 % 111.6 % $ 218,874 26.1 % $ 109,107 19.9 % 100.6 %
Enterprise
Data 65,199 14.2 29,928 10.2 117.9 % 107,708 12.8 46,111 8.4 133.6 %
Automotive 61,019 13.2 48,699 16.6 25.3 % 115,565 13.8 93,566 17.1 23.5 %
Industrial 55,865 12.1 43,323 14.8 28.9 % 104,403 12.5 83,111 15.2 25.6 %
Communications 59,299 12.9 37,459 12.8 58.3 % 114,873 13.7 73,528 13.4 56.2 %
Consumer 97,334 21.1 76,113 25.9 27.9 % 177,295 21.1 142,349 26.0 24.5 %
Total $ 461,004 100.0 % $ 293,317 100.0 % 57.2 % $ 838,718 100.0 % $ 547,772 100.0 % 53.1 %
Revenue for the three months ended June 30, 2022 was $461.0 million , an increase
of $167.7 million , or 57.2%, from $293.3 million for the three months ended June
30, 2021 . Overall unit shipments increased by 21% and average sales prices
increased by approximately 31% compared to the same period in 2021. The increase
in average sales prices was primarily driven by favorable changes in product mix
with more sales coming from products with higher unit prices.
For the three months ended June 30, 2022 , revenue from the storage and computing
market increased $64.5 million , or 111.6%, from the same period in 2021. This
increase was primarily due to higher storage and commercial notebook sales.
Revenue from the enterprise data market increased $35.3 million , or 117.9%, from
the same period in 2021. This increase was primarily due to an accelerated ramp
up in our data center and workstation computing sales. Revenue from the
automotive market increased $12.3 million , or 25.3%, from the same period in
2021. This increase was primarily driven by sales growth for applications for
advanced driver assistance systems, digital cockpit and lighting products.
Revenue from the industrial market increased $12.5 million , or 28.9%, from the
same period in 2021. This increase was primarily driven by higher sales
in industrial meters and security applications. Revenue from the communications
market increased $21.8 million , or 58.3%, from the same period in 2021. This
increase primarily reflected higher revenue related to 5G infrastructure.
Revenue from the consumer market increased $21.2 million , or 27.9%, from the
same period in 2021. This increase was primarily driven by strength in home
appliances, smart TVs and gaming, which was partially offset by decreased sales
for mobile devices.
Revenue for the six months ended June 30, 2022 was $838.7 million , an increase
of $290.9 million , or 53.1%, from $547.8 million for the six months ended June
30, 2021 . Overall unit shipments increased by 21% and average sales prices
increased by 28% compared to the same period in 2021. The increase in average
sales prices was primarily driven by favorable changes in product mix with more
sales coming from products with higher unit prices.
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For the six months endedJune 30, 2022 , revenue from the storage and computing market increased$109.8 million , or 100.6%, from the same period in 2021. This increase was primarily due to higher storage and commercial notebook sales. Revenue from the enterprise data market increased$61.6 million , or 133.6%, from the same period in 2021. This increase was primarily due to an accelerated ramp up in our data center and workstation computing sales. Revenue from the automotive market increased$22.0 million , or 23.5%, from the same period in 2021. This increase was primarily driven by sales growth for applications for advanced driver assistance systems, digital cockpit and lighting products. Revenue from the industrial market increased$21.3 million , or 25.6%, from the same period in 2021. This increase was broad-based and included higher sales in industrial meters. Revenue from the communications market increased$41.3 million , or 56.2%, from the same period in 2021. This increase primarily reflected higher revenue related to 5G infrastructure. Revenue from the consumer market increased$34.9 million , or 24.5%, from the same period in 2021. This increase was primarily driven by strength in home appliances, gaming and smart TVs, which was partially offset by decreased sales for mobile devices.
Cost of Revenue and Gross Margin
Cost of revenue primarily consists of costs incurred to manufacture, assemble
and test our products, as well as warranty costs, inventory-related and other
overhead costs, and stock-based compensation expenses.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(in thousands, except percentages)
Cost of revenue $ 190,043 $ 129,102 47.2 % $ 348,877 $ 242,498 43.9 %
As a percentage
of revenue 41.2 % 44.0 % 41.6 % 44.3 %
Gross profit $ 270,961 $ 164,215 65.0 % $ 489,841 $ 305,274 60.5 %
Gross margin 58.8 % 56.0 % 58.4 % 55.7 %
Cost of revenue was $190.0 million , or 41.2% of revenue, for the three months
ended June 30, 2022 , and $129.1 million , or 44.0% of revenue, for the three
months ended June 30, 2021 . The $60.9 million increase in cost of revenue was
primarily due to a 21% increase in overall unit shipments and a 29% increase in
the average direct cost of units shipped. The increase in cost of revenue was
also driven by an increase in manufacturing overhead costs and inventory
write-downs.
Gross margin was 58.8% for the three months ended June 30, 2022 , compared with
56.0% for the three months ended June 30, 2021 . The increase in gross margin was
mainly driven by a favorable product mix, and lower manufacturing overhead costs
and inventory write-downs as a percentage of revenue.
Cost of revenue was $348.9 million , or 41.6% of revenue, for the six months
ended June 30, 2022 , and $242.5 million , or 44.3% of revenue, for the six months
ended June 30, 2021 . The $106.4 million increase in cost of revenue was
primarily due to a 21% increase in overall unit shipments and a 25% increase in
the average direct cost of units shipped. The increase in cost of revenue was
also driven by an increase in manufacturing overhead costs.
Gross margin was 58.4% for the six months ended June 30, 2022 , compared with
55.7% for the six months ended June 30, 2021 . The increase in gross margin was
mainly driven by a favorable product mix, and lower manufacturing overhead costs
and inventory write-downs as a percentage of revenue.
Research and Development
R&D expenses primarily consist of salary and benefit expenses, bonuses, stock-based compensation and deferred compensation for design and product engineers, expenses related to new product development and supplies, and facility costs.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(in thousands, except percentages)
R&D expenses $ 57,131 $ 44,753 27.7 % $ 111,234 $ 86,645 28.4 %
As a percentage
of revenue 12.4 % 15.3 % 13.3 % 15.8 %
R&D expenses were $57.1 million , or 12.4% of revenue, for the three months ended
June 30, 2022 , and $44.8 million , or 15.3% of revenue, for the three months
ended June 30, 2021 . The $12.3 million increase in R&D expenses was primarily
due to an increase of $14.1 million in cash compensation expenses, which include
salary, benefits and bonuses, and an increase of $2.4 million in stock-based
compensation expenses, which were mainly associated with performance-based
equity awards. The increase was partially offset by a $2.9 million benefit
related to changes in the value of the deferred compensation plan liabilities.
Our R&D headcount was 1,154 employees as of June 30, 2022 , compared with 941
employees as of June 30, 2021 .
R&D expenses were $111.2 million , or 13.3% of revenue, for the six months ended
June 30, 2022 , and $86.6 million , or 15.8% of revenue, for the six months ended
June 30, 2021 . The $24.6 million increase in R&D expenses was primarily due to
an increase of $23.9 million in cash compensation expenses, which include
salary, benefits and bonuses, and an increase of $4.7 million in stock-based
compensation expenses, which were mainly associated with performance-based
equity awards. The increase was partially offset by a $4.1 million benefit
related to changes in the value of the deferred compensation plan liabilities.
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Selling, General and Administrative ("SG&A")
SG&A expenses primarily include salary and benefit expenses, bonuses, stock-based compensation and deferred compensation for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities costs, and professional service fees.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(in thousands, except percentages)
SG&A expenses $ 70,668 $ 57,238 23.5 % $ 137,822 $ 108,691 26.8 %
As a percentage
of revenue 15.3 % 19.5 % 16.4 % 19.8 %
SG&A expenses were $70.7 million , or 15.3% of revenue, for the three months
ended June 30, 2022 , and $57.2 million , or 19.5% of revenue, for the three
months ended June 30, 2021 . The $13.5 million increase in SG&A expenses was
primarily due to an increase of $8.0 million in stock-based compensation
expenses, which were mainly associated with performance-based equity awards, and
an increase of $7.5 million in cash compensation expenses, which include salary,
benefits and bonuses. The increase was partially offset by a $4.4 million
benefit related to changes in the value of the deferred compensation plan
liabilities. Our SG&A headcount was 731 employees as of June 30, 2022 ,
compared with 610 employees as of June 30, 2021 .
SG&A expenses were $137.8 million , or 16.4% of revenue, for the six months ended
June 30, 2022 , and $108.7 million , or 19.8% of revenue, for the six months ended
June 30, 2021 . The $29.1 million increase in SG&A expenses was primarily due to
an increase of $16.5 million in stock-based compensation expenses, which were
mainly associated with performance-based equity awards, and an increase of $15.3
million in cash compensation expenses, which include salary, benefits and
bonuses. The increase was partially offset by a $6.6 million benefit related to
changes in the value of the deferred compensation plan liabilities.
Litigation Expense
Litigation expense was $1.3 million for the three months ended June 30, 2022 ,
compared with $1.6 million for the three months ended June 30, 2021 . The
decrease was due to a decrease in litigation activity related to ongoing patent
infringement and other matters.
Litigation expense was
Other Income (Expense), Net Other expense, net, was$5.1 million for the three months endedJune 30, 2022 , compared with other income, net, of$3.0 million for the three months endedJune 30, 2021 . The increase in expense was primarily due to an increase of$6.9 million in expense related to changes in the value of the deferred compensation plan investments and an increase of$2.4 million in charitable contributions, which was partially offset by a$0.8 million favorable impact of foreign currency exchange rates. Other expense, net, was$5.7 million for the six months endedJune 30, 2022 , compared with other income, net, of 5.6 million for the six months endedJune 30, 2021 . The increase in expense was primarily due to an increase of$10.3 million in expense related to changes in the value of the deferred compensation plan investments and an increase of$2.8 million in charitable contributions, which was partially offset by an increase of$1.1 million in net interest income and a$0.7 million favorable impact of foreign currency exchange rates. Income Tax Expense The income tax provision or benefit for interim periods is generally determined using an estimate of our annual effective tax rate and adjusted for discrete items, if any, in the relevant period. Each quarter the estimate of the annual effective tax rate is updated, and if our estimated tax rate changes, a cumulative adjustment is made. The income tax expense for the three months endedJune 30, 2022 was$22.1 million , or 16.2% of pre-tax income. The income tax expense for the six months endedJune 30, 2022 was$38.1 million , or 16.4% of pre-tax income. The effective tax rates were lower than the federal statutory rate primarily due to foreign income from our subsidiaries inBermuda andChina being taxed at lower statutory tax rates, and excess tax benefits from stock-based compensation. The decrease in the effective tax rates relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax. The income tax expense for the three months endedJune 30, 2021 was$8.5 million , or 13.3% of pre-tax income. The income tax expense for the six months endedJune 30, 2021 was$11.8 million , or 10.5% of pre-tax income. The effective tax rates were lower than the federal statutory rate primarily due to foreign income from our subsidiaries inBermuda andChina being taxed at lower statutory tax rates, the impact of federal tax credits from R&D activities, and excess tax benefits from stock-based compensation. The decrease in the effective tax rates relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax. 30
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Liquidity and Capital Resources
June 30, December 31,
2022 2021
(in thousands, except percentages)
Cash and cash equivalents $ 342,867 $ 189,265
Short-term investments 469,012 535,817
Total cash, cash equivalents and short-term
investments $ 811,879 $ 725,082
Percentage of total assets 45.5 % 45.7 %
Total current assets $ 1,332,089 $ 1,124,852
Total current liabilities (254,487 ) (226,944 )
Working capital $ 1,077,602 $ 897,908
As of June 30, 2022 , we had cash and cash equivalents of $342.9 million and
short-term investments of $469.0 million , compared with cash and cash
equivalents of $189.3 million and short-term investments of $535.8 million as of
December 31, 2021 . As of June 30, 2022 , $249.5 million of cash and cash
equivalents and $294.1 million of short-term investments were held by our
international subsidiaries. We may repatriate cash from our Bermuda subsidiary
to fund our expenditures in future periods. We anticipate that earnings from
other foreign subsidiaries will continue to be indefinitely reinvested.
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